Conversation with Whitney Tilson and Glenn Tongue on More Mortgage Meltdown
What has changed since this book was written?
Indeed a lot has changed and, by and large, I'm pleased with how our stocks and predictions did. Our biggest mistake wasn't fully appreciating how vast the government intervention in the housing market would be. Our economic/supply-demand analysis showed another 10%+ drop in housing prices, but this didn't happen because the government poured trillions of dollars into the financial sector and effectively nationalized the mortgage market. Major government action is something that a lot of investors miss -- for example, those who were betting on a disorderly collapse of the euro. Conversely, those counting on regulators to shut down obviously fraudulent businesses may wait forever -- Allied Capital and MBIA prior to the bubble bursting are good examples (I highly recommend the related books, Fooling Some of the People All of the Time and Confidence Game).
If we were to do it again, we would have had a better marketing plan. But basically I think it did the job.
I agree with Whitney's book endorsements and hope to discuss those two in future book notes. What would you do differently as an investor as a result of this book?
Writing the book was a good forcing mechanism to REALLY learn what was going on in the housing market, and REALLY learn the companies I wrote about -- both of which turned out to be very profitable. It underscored the need to do very in-depth research and generate proprietary insights, which is key to investment success.
I think we still have a lot of hindsight bias so we have missed most of the housing recovery plays. I wish I had been more open minded about them. The financials are a different story. The work we did, especially on Wells Fargo, and subsequent success, has left us more open minded to their potential. For example, we believe AIG is a terrific idea, which we never would have attempted to understand pre-book.
What was most applicable? You do not need to read between the lines to find applicable investment ideas in this book. The book includes recommendations for specific stock ideas with sound reasoning behind them.
First, Tilson and Tongue recommend Berkshire Hathaway (BRK.B). At the time, this was their largest investment. They know BRK.B as well as anyone and lay out their case persuasively. Astonishingly, at the time of publication, Berkshire Hathaway was trading at approximately the value of its cash and investments. Net of the value of these balance sheet assets, Warren Buffett's investment skill was being provided to his shareholders for free. As recently as February 15, 2013, Tilson has disclosed that Berkshire Hathaway remains a major investment, his second-largest position, after American International Group (AIG).
Their second investment idea is to go long American Express (AXP). American Express's largest investor, Berkshire Hathaway, was prevented from adding to its stake due to limitations of bank holding companies. Because this prevented Warren Buffett from expressing his view by buying stock, he was more talkative about this opportunity than usual. Buffett said that, "It's very clear that American Express's losses in 2009 on their receivables will be, you know, considerably higher than last year. And their earnings will suffer to some degree accordingly. But that doesn't mean that American Express isn't a hell of a buy at $10. American Express is going to be around forever. They've got the cream of cardholders. Unfortunately, they have some cardholders that aren't the cream, too." As is often the case, Buffett and Tilson appeared to be thinking in the same way.
Resource American (REXI) was the third recommendation. As of March 10, 2009, it was at $3.19, despite Tilson's estimate of intrinsic value as between $8.66 and $22.04. It last traded at $8.35, up over two and a half times since the book was published, yet still below what the book laid out as its intrinsic value.
In addition to the specific investment ideas, Part Two of the book, "Profiting from the Meltdown," lays out the core tenants of value investing in a wonderful chapter "Advice for All Investors." One keeps waiting for the hard part… and it never comes. The basic skills associated with valuation are not that complicated. What is much more difficult is the cultivation of the proper temperament to be a value investor. One must control emotions, keep fear in check, avoid panic, and reflect in order to make good investment decisions. Such self-mastery can be more crucial - and more difficult - than the analysis itself.
Finally, if you enjoyed this book as much as I did, you might also be interested in reading The Art of Value Investing: Essential Strategies for Market-Beating Returns when it is released on May 6 of this year.
The housing market has imploded and the stock market has followed suit, with stock portfolios, retirement accounts, and pension funds cut in half. The U.S. economy is reeling from the real estate meltdown and credit crunch. Not stopping at the border, the storm has broadened to Europe, Asia, and beyond throughout 2008 and into 2009. Is there anyone on the planet who has not been touched by this disaster?
Even though we've all been affected by the calamity and have heard no shortage of news about it, it still seems unfathomable and utterly incomprehensible to most people that the actions of certain banks, mortgage companies, and Wall Street firms could bring the economic engine of the world to a grinding halt. Now, for the first time, and in terms everyone can grasp, noted analyst and value investing expert Whitney Tilson, along with his partner Glenn Tongue, explains not only how it happened, but shows that the tsunami of credit problems isn't over. Another even larger wave is yet to come. If you know catastrophe is looming, you can sidestep the train wreck, and even profit, but you need to understand how bad times present opportunity and where to look.